The Principles of Fiscal Federalism in Switzerland illustrated by the Reform of Financial Equalization and Task Allocation between the Confederation and the cantons (RET) Walter Moser, Economist, Conference of Cantonal Governments, Berne

Switzerland A small multi-ethnic, multilingual and multi-confessional nation shaped by the will of its people a federal state since 1848 constituted by the people and the cantons a federation built from the bottom up

The three political levels The Confederation The 26 cantons 2‘721 communes

Core functions of federalism Competition between the cantons induces innovative ideas and leads to better solutions Fiscal competition keeps taxes at a lower level Federalism distributes political power to the three levels and leads to a decentralization Federalism gives more organizational power to minorities and regions

Three guiding principles of Swiss federalism Subsidiarity a new expression for an old principle „Every task shall be accomplished on the lowest possible level“ Fiscal Equivalence „Who takes profit pays, who pays decides“ Direct democracy Elections Voting People‘s initiatives Referendums Petitions

Subsidiarity as a guideline for task allocation between the public and private sector State quota 2005: 36.4 % of GDP (including social security) with a growing tendency between the three levels of the federal state Regional and local problems have to be solved at the cantonal or communal level National concerns need national solutions

Public sector expenditure 2005

Public sector revenue 2005

Fiscal equivalence Links cost to benefit Leads to congruence between deciding on expenditure and financing Prevents free riding

Direct democracy in public spending On the federal level Tax sources and maximum tax rates fixed in the federal constitution „brake to debt“ forces parliament to restrict spending No budget and specific financial referendum On the state level Different forms of budget and financial referenda On the communal level Fixation of the tax rates and the user charges by the citizens Mandatory budget referendum in most communes

Former situation Strong points Weak points Relatively low tax burden Good identity of the citizens with their cantons Strong fiscal competition between the cantons Differences in the service level Weak points Slow political system Tax burden between the cantons differs to much Many inefficiencies, due to wrong incentives in the transfer system Creeping centralization Differences in the service level

Reform of financial equalization and task allocation (RET / NFA) A project of renovation for Swiss federalism Elaborated in partnership between the Confederation and the Cantons Complex project Amendments to the federal Constitution New laws both on the federal and the cantonal levels Changes in the financial flows

Two starting points, five pillars Financial equalization Equalization of resources Cost compensation Reallocation of tasks between Confederation and cantons Disentanglement of tasks and financial flows New forms of cooperation between Confederation and cantons Strengthening the inter-cantonal cooperation

Concept of financial equalization

Financial equalization Equalization of resources Deficiencies of the former system Resource indicator Minimal funds for all cantons Financed by the Confederation and the financially strong cantons Cost Compensation Geographic and topographic cost compensation Socio-demographic cost compensation Financed by the Confederation

Effects of resource equalization

Reallocation of tasks between the Confederation and the cantons Disentanglement of tasks and financial flows Principle of subsidiarity New forms of cooperation between Confederation and cantons Cooperation instead of ordering by decree Inter-cantonal cooperation with cost compensation Can be declared mandatory in 9 specified domains

Concluding remarks Favoring federalism means accepting differences The principle of subsidiarity moves political decisions closer to the citizens Fiscal equivalence ensures that those who decide have to bear the financial consequences of their decisions Direct democracy guarantees direct government accountability to citizens